The US$69.1bn contract between Saudi Aramco and Saudi Basic Industries Corporation (SABIC) is expected to help the Saudi oil giant to expand aggressively in the downstream sector and boost its profits
The acquisition of SABIC can enable wider collaboration and avoid competition as the two firms have more recently overlapped in the natural positions of the two separate firms, particularly around petrochemicals. Steve Zinger, senior vice-president of chemicals for Wood Mackenzie, outlines three vital catalysts for the Saudi Aramco-SABIC deal.
1. Vertical Integration
The portfolio of the two companies aligns well, noted Wood Mackenzie, adding that expansion for Saudi Aramco into further downstream exposure offers protection in a lower oil demand outlook.
Petrochemicals are expected to be one of the main drivers of oil demand growth up to 2040, and SABIC brings this through deep downstream market positions.
An acquisition approach enables Saudi Aramco to gain further exposure to petrochemical markets more quickly than would be the case through a sole focus on organic expansion and development. The human aspect of the upstream and downstream industries also requires different skills and sets. Acquisition speeds up this development across both companies.
2. Geographical Expansion
SABIC maintains strong marketing of chemicals in all major regions, enabling increased market access for new products developed under Saudi Aramco or joint projects, the report noted.
Former acquisitions by SABIC have provided direct access to the European market. Saudi Aramco has existing joint venture positions in South Korea (S Oil) and in China (Fujian) and is also currently planning multiple refinery-integrated investments globally in the US (Motiva), Saudi Arabia (COTC and SATORP projects), India (Ratnagiri) and Malaysia (RAPID).
A combined Saudi Aramco/SABIC entity allows truly global reach and market-leading positions across a strong vertically-integrated portfolio of oil-to-chemicals. Synergies and optimisation across the combined global footprint is undoubtedly possible.
3. Technology Transfer
The report further stated that SABIC holds very strong petrochemical assets and several technologies in some of the chains that it has market-leading positions, such as polyethylene and ethylene glycol.
Saudi Aramco is looking to add value to its refining portfolio via petrochemicals. Technology transfer across the two companies provides a wider range of possibilities and options for potential project configurations. The combined Saudi Aramco/SABIC entity also forms a strong basis for longer-term technology developments in the entire energy value chain.
